Inheritance Tax Basics for Estate Planners

Inheritance Tax (IHT) is charged on estates above certain thresholds. While you don't need to be a tax specialist, every estate planner needs basic IHT knowledge. For the complete career overview, see our guide on How to Become an Estate Planner UK.

Current thresholds (2025/26):

• •Nil rate band: £325,000
• •Residence nil rate band: £175,000 (when passing home to direct descendants)
• •Combined: up to £500,000 per person
• •Married couples/civil partners: can transfer unused allowance

Key rates:

• •IHT rate: 40% on value above threshold
• •Reduced rate: 36% if leaving 10%+ to charity
• •Potentially Exempt Transfers: 7-year rule applies

What's included in an estate:

• •Property
• •Savings and investments
• •Personal possessions
• •Life insurance (not in trust)
• •Gifts made within 7 years
• •Trust interests

What you need to know:

• •Basic calculation of potential IHT liability
• •Main exemptions and reliefs
• •When IHT planning might help
• •When to refer to specialists

Several exemptions and reliefs can reduce or eliminate IHT:

Spouse/civil partner exemption:

• •Transfers between spouses are exempt
• •No limit on amount
• •Transferable nil rate band on death

Charity exemption:

• •Gifts to UK charities are exempt
• •Can reduce rate to 36% if 10%+ left to charity

Annual exemptions:

• •£3,000 annual exemption (unused can be carried forward one year)
• •Small gifts exemption: £250 per person per year
• •Wedding/civil partnership gifts: £5,000 from parents, £2,500 from grandparents, £1,000 from others

Business Relief:

• •100% relief on some business assets
• •50% on others
• •Complex rules - refer to specialists

Agricultural Relief:

• •100% or 50% on agricultural property
• •Complex qualifying conditions
• •Refer to specialists

Normal expenditure from income:

• •Regular gifts from surplus income
• •Must be habitual, from income, leave enough to maintain lifestyle
• •Good planning tool but complex to demonstrate

Your role with IHT is awareness and appropriate referral:

What you should do:

• •Understand basic IHT position of clients
• •Explain exemptions and allowances
• •Incorporate simple IHT-efficient provisions in wills
• •Identify when specialist advice is needed
• •Document that you're not giving tax advice

Simple IHT planning in wills:

• •Using both nil rate bands effectively
• •Charitable legacies to reduce rate
• •Discretionary trusts for flexibility
• •Life interest trusts in some situations

What requires specialist referral:

• •Complex business ownership
• •Agricultural property
• •International assets
• •Significant wealth (estates over £2m)
• •Lifetime giving strategies
• •Trust planning for IHT

How to discuss IHT with clients:

• •"Based on what you've told me, your estate may/may not be above the IHT threshold"
• •"There are some provisions we can include in your will that may help"
• •"For detailed tax planning, I'd recommend speaking to a specialist"
• •"I can refer you to someone if you'd like"

Documentation:

Always note in your file:

• •Whether IHT was discussed
• •What general information was provided
• •That detailed tax advice was not given
• •Whether referral was offered

Clients often have IHT questions. Here's how to handle them:

"Will my estate pay inheritance tax?"

• •Help them understand the thresholds
• •Consider property value, savings, etc.
• •Note that spouse transfers are exempt
• •Explain the residence nil rate band if applicable

"How can I avoid inheritance tax?"

• •Explain that legitimate planning exists
• •Mention the 7-year rule for gifts
• •Note the spouse exemption
• •Recommend specialist advice for detailed planning

"Should I give everything away now?"

• •Explain the 7-year rule
• •Warn about deprivation of assets for care fees
• •Suggest they consider their own needs first
• •Recommend professional advice before major gifts

"My house is worth £X - what will the tax be?"

• •Explain it's based on total estate
• •Note the residence nil rate band
• •Factor in debts and other assets
• •Give rough indication, not detailed calculation

Key message: You can provide general information and education. For detailed tax planning or calculations, refer to accountants or specialist IHT planners.